The European Commission on Wednesday proposed new banking supervision powers for the European Central Bank (ECB) as part of a banking union.

"The Commission is presenting legislative proposals for a single European supervisory mechanism," European Commission President Jose Manuel Barroso told the European Parliament in Strasbourg in his annual "state of the union" address.

"The crisis has shown that while banks became transnational, rules and oversight remained national," Barroso said. "We need to move to common supervisory decisions, namely within the euro area."

"This is a quantum leap, the stepping stone to a banking union," he added.

Under the banking union proposals, the ECB would get the power to monitor all eurozone banks and others in the wider European Union (EU) that agree to the oversight, before the establishment of a fund to close troubled banks and the formation of a scheme to protect citizens' deposits across the eurozone.

"This new system, with the European Central Bank at the core and involving national supervisors, will restore confidence in the supervision of all banks in the euro area," Barroso said.

While urging the European Parliament to play a crucial role in ensuring "democratic oversight," Barroso said, "We should make it a top priority to get the European supervisor in place by the start of next year."

"We want to break the vicious link between sovereigns and their banks. In the future, bankers' losses should no longer become the people's debt, putting into doubt the financial stability of whole countries," he added.

Michel Barnier, the European Commissioner in charge of financial regulation, said that banking supervision needs to become more effective in all European countries to make sure that single market rules are applied in a consistent manner.

"It will be the role of the ECB to make sure that banks in the euro area stick to sound financial practices. Our ultimate aim is to stop using taxpayers' money to bail out banks," the Commissioner said.

"We have proposed a mechanism to separate supervision from monetary policy within the ECB, and made sure that the ECB will be accountable to the European Parliament for supervisory decisions," he added.

The Commission called upon the European Council and the European Parliament to adopt the proposals by the end of 2012, according to a statement on the website of the Commission.

The measures will also be subject to approval by all EU member states, which would have to agree to give up a degree of sovereignty over national banking supervision.